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Exchange traded funds pool the financial resources of several people and use it to purchase various tradable monetary assets such as shares, debt securities such as bonds and derivatives. Most ETFs are registered with the Securities and Exchange Board of India (SEBI). It is an appealing option for investors with limited expertise of the stock market.
An exchange traded fund or ETF is a fund that is listed and traded on the stock exchange. ETFs are similar to index mutual funds but they trade just like stocks. An ETF is available for purchase from the fund house during the New Fund Offer (NFO) period. Post the NFO, the units of the fund are listed on the stock exchange for purchase and sale.
Below are some of the features of the Exchange Traded Funds:
The most common types of ETF funds (India) are:
ETFs are launched by asset management companies just like other mutual fund schemes. An ETF is a passively managed fund and hence has a lower fund management fee as compared to an actively managed mutual fund scheme.
Investments can be made by purchasing units of the desired ETF during the trading hours at market driven price of the ETF. Investors can give instructions to their broker to invest or can invest on their own using the online trading interface provided by the broker.
An investor must have a demat account with a depository participant as well as a trading account with a stock broker or sub-broker. One can opt to open a 3-in-1 account comprising a bank account, demat account and trading account which allows managing investments in an efficient manner at one place. The account can be opened by filling up a form and submission of KYC documents.
Below are some of the advantage of the ETF:
ETFs have certain shortcomings which you should be aware of before investing in an ETF trading company.
Since ETFs are traded like shares, there are several expenses which have to be incurred to purchase them. This is generally done by the fund managers, who charge a nominal commission fee for such transactions.
You can also opt to transact by yourself on the share market and not involve any fund managers in the process. A Demat account has to be opened in such a situation. Operating a Demat account requires basic knowledge of stock market transactions and its associated technique, which might be difficult for a novice.
ETF companies listed on a stock exchange are subject to price fluctuations as per market trends. They are not stable like government bonds. Earning a profit or incurring a loss depends heavily on the stock market conditions.
Exchange traded funds have moderate diversity. As most ETFs are passively managed, they generally invest in best-performing companies listed on a particular stock exchange. ETF organisations often overlook small scale companies with huge potential.
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